The best dividend stocks offer both solid yields and the potential for dividend growth. A high yield alone won't cut it, and dividend growth from a small base doesn't get the job done, either. A healthy combination of both factors is what dividend investors should be looking for.
Want a few examples? Automatic Data Processing (ADP -0.09%), NextEra Energy Partners (NEP 2.99%), and Wal-Mart Stores (WMT 1.32%) are three stocks with solid dividends that are expected to boost those dividends in short order. Here's what our Foolish investors have to say about these stocks.
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Hire this dividend stock for your portfolio
Dan Caplinger (Automatic Data Processing): Dividend investors know that many dependable companies make regular increases to their quarterly payouts on a predictable schedule. Automatic Data Processing has put together an attractive track record of performance for those who count on dividends, having made boosts to its dividend every year for 42 straight years. The payroll services specialist's yield of 2% roughly matches that of the market, but that's largely a function of the strong share-price performance that the stock has enjoyed in recent years.
ADP tends to raise its dividend every January, with its most recent increase of nearly 8% getting announced in early November of last year. The U.S. economy has picked up steam in 2017, and the employment picture in particular continues to look brighter. ADP hasn't entirely prospered despite a better environment, with company-specific challenges weighing on the human capital management solutions provider's results over the past year. Yet ADP is confident that it will return to stronger fundamental performance in the near future, and it's likely to express that confidence by sharing its success with shareholders yet again with a higher dividend. If you're looking for a dividend stock that both pays solid levels of current income and has considerable growth potential, then Automatic Data Processing deserves to be on your short list.
An energy yield built for the future
Travis Hoium (NextEra Energy Partners): Energy yieldcos are among the most dependable dividend stocks on the market, backed by renewable-energy projects that have contracted revenues for decades into the future. One of the industry leaders is NextEra Energy Partners, which is among the biggest renewable-energy owners in the world.
One critical advantage for NextEra Energy Partners is that it can leverage its parent company, NextEra Energy (NEE 0.54%), which can drop down projects that will be accretive to the dividend. The yieldco can fund those acquisitions, through excess cash generated from existing projects or by issuing shares and debt.
The key for yieldcos' dividend growth is keeping a pipeline of projects to buy, and NextEra Energy has 13 GW of potential projects that could be dropped down. If investors are confident that future project acquisitions will occur, they'll price in long-term dividend growth, which makes it easier to fund those acquisitions using stock, presuming they buy projects with a higher rate of return than the dividend yield. It's a self-reinforcing cycle.
Today, NextEra Energy Partners is paying a dividend of $1.57 per share on an annualized basis, but it plans to grow the dividend 12% to 15% through 2022 with existing cash flow and acquisitions. And its projected cash available for a distribution run rate of $310 million to $340 million at the end of 2017 implies that it could raise its dividend as high as a 16% yield without adding more projects. With that kind of cash flow already locked in, this is a great dividend growth stock and is about as steady as an energy stock gets.
Four decades of growing dividends
Tim Green (Wal-Mart Stores): Retailer Wal-Mart has raised its dividend annually for 44 years in a row. While profits have taken a hit during the past few years as the company boosted wages and invested in its e-commerce business, those moves are setting up Wal-Mart to maintain its brick-and-mortar dominance and become a major player in the world of online retail.
Wal-Mart's comparable sales in the U.S. have increased for 12 consecutive quarters, an impressive result given the upheaval facing the retail industry. The e-commerce business is also booming, posting a 60% year-over-year sales increase during the most recent quarter. Wal-Mart has greatly increased its online assortment, acquired start-ups including Jet.com and Bonobos, rolled out free two-day shipping, and aggressively expanded its online grocery service to more than 1,000 stores. The results speak for themselves.
These investments haven't come cheap, but the good news for dividend investors is that the payout ratio remains below 50%. Wal-Mart's current $2.04 per-share dividend, spread across four quarterly payments, eats up 47% of its guidance for fiscal 2018 adjusted earnings and represents a yield of about 2.3%. That leaves room to grow the dividend even if earnings growth remains sluggish. I wouldn't expect anything more than a small dividend increase come February, but investors can bank on seeing Wal-Mart extend its streak to 45 years.
